Art Pope and his allies sharpen their knives on the state budget

There's a pause in the action in Raleigh as Gov. Pat McCrory appoints his staff and the newly organized General Assembly breaks until the end of the month. But it's only a pause.

There's an eagerness to get things done. And with the Republican governorship and overwhelming GOP majorities in the state House and Senate, little lies in the way. Change will happen. The only questions are how much and in what form. The answers come soon since the first task is the state budget.

Among the main reasons the Legislature held a one-day session and promptly adjourned is so that its large class of newcomers—more than half are in their first or second terms—can get up to speed on state finances and expenditures before lawmakers reconvene Jan. 30. Expect sweeping changes on both sides of the balance sheet.

Revenues

During election season it was hard to find an interview with any candidate that didn't mention the urgent need to "reform" the state tax code. At least a half dozens studies from the past two decades—gathering dust in the legislative library—back that up. With tax code changes near the top of the governor's list of promises, this is the year.

It was no coincidence that during the first week of the McCrory administration Arthur Laffer, famous for developing supply-side economics—aka the trickle-down theory—was making the rounds in Raleigh. Laffer gave a talk sponsored by the John Locke Foundation, an organization founded by Art Pope, the governor's new state deputy budget director. Laffer was selling a plan put together by his consulting firm and the Civitas Institute—a Pope Foundation-funded think tank—to eliminate the state corporate and income taxes and replace them with a sales tax hike.

The report, entitled "More Jobs. Bigger Paychecks," came out in mid-December. Part of the sales pitch for the concept is neatly summed up in a headline from the executive summary, "Progressive Income Taxes More Harmful to Growth."

Whether McCrory will buy into the plan this year is unclear. So far, the governor has offered no specifics on his budget. (Neither Pope nor the governor's press office responded to requests for information for this column.) But it should be noted that while McCrory talked about "cutting" income taxes and "reducing" corporate rates during the campaign, he chose a different verb last weekend during his inaugural address, saying "Government must work with business as partners—not against them as adversaries—to identify and eliminate burdensome taxes, rules and regulations that stifle economic growth."

The same day, Reuters published a story on the move toward higher sales taxes that quoted state Sen. Bob Rucho, R-Mecklenburg, saying he and other like-minded legislators did indeed have a plan similar to the one outlined in the Civitas/ Laffer study.

"We have no choice but to make change," Rucho, who co-chairs the Senate Finance Committee, told Reuters.

Alexandra Sirota, director of the North Carolina Budget & Tax Center, says it shouldn't be a surprise that the state might make such a major change. Several Republican-led states, most recently Louisiana, have made the move.

"It's a tax proposal that's not modernizing in any sense of the word," she said. "It's going to create an upside-down tax system that asks the middle class to pay more."

Sirota says it would be extremely difficult for the state to make the switch. Most states that have eliminated income and corporate taxes have other revenues sources, such as oil and mineral royalties.

In North Carolina, the pot of gold at the end of the trickle-down rainbow comes mainly from expanding sales taxes to include services and a statewide real estate transfer tax—two changes that would require spending a lot of political capital to pass.

Last week, the N.C. Association of Realtors, one of the most powerful business interests in the state, fired off a warning to its members saying it would fight the proposed fee. The group noted that in 2007 referenda on transfer fees were defeated in all 24 counties that proposed them.

"I doubt they can move that kind of proposal forward even if the sales tax could pay for it," Sirota says.

Expenditures

Whether there's a sweeping rewrite of the tax code this year or not, the GOP majority's effort to restructure state government continues, this time with Pope and McCrory aboard.

Here again, much of what happens will be couched as "reform."

We saw an initial glimpse of state mental health system reforms in a recent report to the new Legislature from a Health and Human Services subcommittee. After years of moving more patients into community-based care, the plan calls for construction of a new state mental hospital. If a new hospital alleviates the burden on community programs, it would be welcome. If it's in lieu of additional aid, then it's a turnaround in policy.

And it was clear last Wednesday during Thom Tillis' speech after being unanimously re-elected Speaker of the House that when he talks about regulatory reform he's talking about further cuts to the already heavily depleted Department of Environment and Natural Resources.

Because of his role as one of the main organizers and financial backers of the Republicans' rise to dominance in elective office, Pope's role in drafting the budget will draw a lot of scrutiny. Since the budget process starts with a proposal from the governor, his stamp will be on the first draft.

His critics have rightfully painted him as a wealthy puppet master who has used his millions to manipulate the political system. But Pope is no outsider.

He knows the system from his years as a legislator—from 1989 to 1992 and again from 1999 to 2002—and guiding an array of think tanks afterward. He knows the budget codes, the intricacies of the various state trust funds and the dedicated revenue streams that keep certain programs afloat.

He issued his first memo as deputy budget director on the Monday after McCrory was sworn in. It included a not-so-subtle reminder to state agencies that by law they must "furnish the Director, in the form and at the time requested by the Director, any information desired by the Director in relation to their respective activities or fiscal affairs."